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UK stock market commentary (September 11, 2012): Worries over China hit UK retailer Burberry

A worrying piece of corporate news this morning has come in the form of Burberry’s profit warning which has seen the stock open down 17% on the open. The main concern over such a move lower is that the retailer has enjoyed a few boom years as a result of the ever growing middle class in the Far East, in particular China. Does this set of results signal a flagging of the Chinese consumer and if it does the ramifications for the rest of us could be greater than many think.

The country’s political issues aside, in the last couple of years China has been hoping that its growth spurt would be sustained by a shift from being export led to more domestic demand and of course Europe and the US’s exporters are now also heavily reliant on the new found wealth of the Chinese. The great debate of a hard or soft landing for their economy rumbles on with as yet no one side being able to claim outright victory in their view. The numbers still tell you however that even if a UK retailer like Burberry which has a large exposure to the country, a “harder” landing will still see Chinese consumption grow in the trillions of dollars over the next decade ultimately making it the largest economy in the world, possibly as soon as 2020.

Chinese equities really have been suffering and even if the most ardent bulls of the soft landing camp are proved right, investors there simply do not believe that such strength in the economy is going to translate into corporate profits. Here Burberry has shown this to be the case where Chinese consumers are still buying kit like it’s going out of fashion, but maybe not so much of the expensive foreign merchandise.

The markets are just in negative territory this morning following a mildly weak session from the US overnight and earlier concerns were that tomorrow’s constitutional court ruling might be delayed. At the time we had been expecting the FTSE to open 30 points lower however confirmation that the ruling in Germany is going to go ahead led the futures to pick up a little and so at the open we are only 10 points in the red at 5780.

Investors took some profits off table after Friday’s rally, sending the euro 48 pips lower to 1.2757 as optimism over the ECB’s plan to buy unlimited government bonds was replaced with plenty of uncertainty. Crucially important, the implications of FOMC’s meeting and Germany’s ruling over its participation in a bailout fund are difficult to predict so plenty of participants went back to the waiting game, taking events one at a time. But the confirmation of the ruling to take place tomorrow has attracted a few more buyers pushing EUR/USD back to the 1.2800 level this morning with the bulls eying up the next resistance levels seen at 1.2830 and 1.2875.

After rallying sharply from mid August to a recent high of 1742 seen on Friday, gold stopped for a breather as investors are trying to assess the likelihood of QE3 being hinted this Thursday at the FOMC meeting. The loss of 11 bucks to 1724.60 was probably due to profit taking and reading too much into it could prove dangerous for now.

Initially, WTI crude prices moved down on signs that oil demand in China, world’s second biggest economy is plunging. However, despite a stronger greenback and a dip in stock markets WTI crude finished the session 30 cents higher at $96.54. It appears energy investors remained focused on the possibility that Federal Reserve will add stimulus measures to help a stuttering economic growth and in turn support demand for crude oil.